The Earned Income Tax Credit (EITC)The Earned Income Tax Credit (EITC) is a refundable tax credit targeted at low-income working families. The credit offsets tax liability, the total amount of tax debt owed by an individual, corporation, or other entity to a taxing authority like the Internal Revenue Service (IRS), and can even generate a refund, with earned income credit amounts calculated on the basis of income and number of children. is a controversial program, and emotions sometimes run high when it’s up for discussion. And, like most of the major taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. provisions in the federal code, it is very much up for discussion, as tax reformers in both houses of Congress, and the staff of the Senate Finance Committee in particular, sift through the arguments for retaining various provisions as part of the “blank slate” approach to reform.
Today we released an analysis of the economic effects of repealing the EITC, garnering a nice write-up over at The Hill, and some interesting reaction on Twitter and elsewhere, with some readers wondering if we had sufficiently addressed the effects a repeal would have on the welfare of the working poor, the group that the credit was created to help.
We believe that, on net, the EITC probably reduces total hours worked as people who are already in the labor force react adversely to the phase-out. However, several studies have found that the EITC encourages some people to enter the work force who otherwise would not at a rate greater than this model assumes. On the other hand, a second effect outside the model cuts in the other direction. A long series of studies by government watchdog agencies have found a considerable amount of EITC fraud, with over 20 percent of payments being improper.
Schuyler went on to explain:
This study is not a condemnation of the EITC, but it’s important to understand the imbalance of its positive and negative effects. What was once introduced as a subsidy for the working poor with children has grown to include disincentives for many middle class workers.
The credit does help workers with very low incomes. For workers with higher earnings, the credit continues to raise incomes until it is fully phased out. The phase-out, however, does discourage workers from accepting more hours worked by reducing the amount of additional pay they would otherwise receive. As a result, our research suggests that the negative impact of the phase-out depresses the labor supply by more than the phase-in bolsters it.
It is possible that tax reformers in Congress could alter the Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. in any number of ways rather than eliminating it, but in the spirit of our Economics of the Blank Slate analysis series, we modeled a scenario in which it was dropped from the code entirely. It's important to rememeber, though, that our analysis also found that pairing an EITC repeal with an across-the-board tax cut would increase GDP by $125 billion per year and add 783,000 full-time jobs. Those additional opportunities would also be good for low-income workers.Share